Equites Property Fund Limited has announced a 2.4% increase in its annual distribution per share in the company’s annual results for the year ended 28th of February 2021.
This was supported by strong growth of 6.7% in South Africa’s like-for-like net rental income due to a robust in-force contractual lease escalation rate coupled with zero tenant defaults and limited lease expiries during the period.
“While the past year has been one of the most challenging to date, Equities have benefited from a defensive and high-quality logistics portfolio in South Africa and the UK, a conservative capital structure as well as a prudent approach to liquidity management throughout the pandemic” commented Equites CEO, Andrea Taverna-Turisan.
“Our financial performance over the past twelve months is testament to the strength of our tenant base, our sound investment philosophy, and our prudent financial risk management policies”.
“Equites has established itself as a market leader in the logistics property space in South Africa and the United Kingdom. The company again made significant progress towards becoming a globally relevant logistics REIT, with the fair value of the property portfolio increasing by 32% to R19.7 billion at 28 February 2021.”
Equites’ largest transaction during the financial year was the joint venture with Shoprite Checkers (Pty) Ltd. for the acquisition of a 50.1% equity stake in three distribution centres with an initial portfolio value of R3.2 billion. These assets are let to Shoprite on fully repairing and insuring twenty-year leases (with three ten-year renewal options) and an annual rental escalation rate of 5%. This was a landmark transaction that presented a compelling investment case, and it is an example of the effective capital allocation decisions to create long-term shareholder value by Equites.
The company invested R2.2 billion in development pipelines in South Africa and the UK. In the past financial year, Equites completed four state-of-the-art logistics facility developments in South Africa with a capital value of R887 million, with another two developments being completed in April 2021 with a combined capital value of R361 million. In the UK, Equites completed the development of a £12 million pre-let building in Leeds, let to DHL on a fifteen-year lease. For the first time in the UK, capital was recycled through the disposal of two properties at a 5.8% premium to book value and a 4.79% exit yield. The sale proceeds will be reinvested into the development of prime distribution warehouses by the Equites/Newlands joint venture, with the new world-class logistics facilities let on twenty- and fifteen-year leases to Hermes and Amazon, respectively.
Equites considers its long-dated leases with low-risk tenants a core fundamental strength of the property portfolio. The WALE of 15.4 years and proportion of A-grade tenants of 95% remain sector-leading. Equites focuses its investment on locations that evidence a strong potential for capital and rental growth, and which serve as proven nodes given their proximity to road networks, densely populated areas, and accessibility to a large labour force, which strongly contributes to the ability to attract robust occupier demand and quality tenants. The only vacancy in the portfolio relates to a single logistics unit located in the United Kingdom.
Equites’ decision to partner with a best-in-class development team, Newlands Property Developments LLP, affords Equites the opportunity to build scale in the premium sector of the UK logistics market at a discount to open market values, making it feasible for Equites to allocate a significant amount of capital to the UK logistics market in the medium term in an extremely competitive market. Equites estimates the total potential pipeline of opportunities through the Newlands partnership to be more than £800 million over the next five years. New development opportunities will be focused on large-scale, world-class distribution facilities in the UK which will be let to multinational tenants with strong covenants on long-term leases. Due to the size of the potential pipeline, Equites is exploring various structures and alternative sources of funding to capitalise on the exciting pipeline of development opportunities in the UK. As there are significantly more development opportunities in the UK compared to South Africa, especially in terms of the opportunity to unlock value, Equites expects the UK portfolio to outgrow the South African portfolio in the medium- to long-term.
Equites maintains a robust balance sheet that offers flexibility for future growth opportunities. During the pandemic, this has been managed particularly prudently, with the loan-to-value ratio (LTV) of 31.2% amongst the most conservative in the sector. Equites adopted a cautious approach to liquidity management – the R800 million capital raise, two dividend reinvestment programmes of R428 million, and additional debt facilities that were secured, significantly improved the liquidity position, and ensured that apposite liquidity buffers were in place throughout the pandemic. Stress tests were rigorously performed to ensure the Group had sufficient liquidity to service obligations.
Equites maintains diversified sources of debt funding both in the UK and in South Africa and now has debt facilities of R7.3 billion (FY20: R5.4 billion) across term facility agreements, unsecured listed and unlisted notes, and working capital facilities. The all-in effective cost of debt has fallen 75 basis points to 5.19% since 29 February 2020, driven principally by the 300bp decrease in base rates in South Africa and 61bp decrease in inter-bank lending rates in the UK. As at 29 February 2021, the group had hedged 96.5% and 80.9% of the existing term loan balances and total committed future cash outflows respectively.
Equites offered deferred rental arrangements to 29 tenants (R35 million to 27 tenants in South Africa and £326k to 2 tenants in the UK). Since granting the deferrals, Equites has seen a promising recovery, with no material defaults and 48% of total deferred rent having been repaid by year-end. The average collection rate over the past year has been 99.3% in South Africa and 100% in the UK. This is testament to a resilient portfolio that comprises 95% A-grade tenants which service a diverse range of industries. The Group does not expect further rental deferrals to be granted to tenants.
Equites engaged with key service providers, together with those participating in the group’s Enterprise Supplier Development programme, to help in ensuring that low-income workers were provided with a living wage throughout the level-5 lockdown period, during which no business activity was undertaken. Equites contributed R2.6 million to various contractors which ensured that all workers on Equites’ development sites received a wage during this time.
“The Covid-19 pandemic has precipitated a dramatic shift in our operating context. Global supply chains have been thrust into the spotlight and retailers have been forced to bolster their e-commerce offerings. We are poised to take advantage of the structural shifts benefiting our asset class and to continue to grow our business in the same manner which has borne fruit over the last seven years. The Equites portfolio continues to present a compelling investment case and has generated strong total shareholder returns of 166% since listing”.
The Board expects that Equites will achieve between 5% and 6% distribution growth per share for the next financial year. Management is also targeting positive net asset value per share growth for FY22, supported by the development pipeline within the Newlands JV. Equites, therefore, expects to achieve a double-digit total return for FY22 (FY21: 7.1%), which is a function of the distribution yield on the NAV per share as well as the growth in NAV per share.
